Mobile Wallet Adoption in India

In 2016, the rising threat and damage caused due to counterfeit currency and the black economy had reached a climactic point to the extent that the Indian government needed to intervene. Overnight, 86% of the total currency in circulation became worthless, and India ground to a halt. A set of payment instruments called Mobile Wallets helped greatly to soften the blow, while also capitalising on the sudden unanticipated cash crunch.

What is a Mobile Wallet?

Digital / Mobile Wallets(used interchangeably, also abbreviated as m-wallets) are virtual wallets that let users to store their money which they can subsequently use for various transactions. Digital wallets are faster and more secure compared to alternatives. A few examples of digital wallets are PayTM, Freecharge, Mobikwik, Ola Money etc.

Open wallets allow you to purchase goods and services, withdraw money in ATMs and transfer funds. These can only be launched in joint collaboration with a bank. M-pesa by Vodafone and ICICI, Visa, MasterCard and RuPay are examples.

Semi Closed payment systems, on the other hand do not permit cash withdrawal or redemption, but allow you to buy goods and services at listed merchants and perform financial transactions at listed locations. Examples include PayTM, Mobikwik and Freecharge.

Finally, there are closed wallets where the money can only be used with a particular service. Uber Credits / Swiggy Money are examples where the money can be used to purchase services on only Uber and Swiggy respectively.

Mobile Wallet Adoption

Technology Adoption Lifecycle

The process of adoption of any technology is typically represented as a bell curve — the classic normal distribution separated by a ‘chasm’. Mobile wallet adoption in India is between the Early Adopter and the Early Majority phase, with the different categories of users defined as identified below:

Innovators: The innovators were the earliest users of Mobile Wallets. These are mostly users based in urban cities, in the 21–35 age group. These users are technology enthusiasts, eager to make the first applications of upcoming technology trends. These users aren’t usually bothered about the product being sufficiently polished or usable, and usually serve as the first user segment for the product. It should also be noted that the features used/desired by these users might not be the ones that the broader market necessarily cares about the most.

Early Adopters: The early adopters segment is composed of people who started using m-wallets during the 2012–15 period. These were people who are used to plastic money and online shopping, and were lured by the offers and discounts going around in this period. The early adopter demographic, again was that of young tech savvy people residing primarily in metro cities. Early adopters are more discrete in their adoption choices than the innovators, and have a high degree of opinion leadership. The primary triggers for adoption for these users was the convenience that came with using wallets (where the transactions take lesser steps than credit cards), and being able to do away with the hassle of carrying exact change. The adoption was also helped by the fact that a lot of other “internet/mobile-first” industries such as on-demand-transportation(Uber, Ola), FoodTech(Swiggy, FreshMenu, Zomato etc) were becoming more widely used during this period where the m-wallets were natively integrated from the very beginning.

Early Majority: The early majority is the audience that took up mobile wallets during and immediately after the demonetisation move, when there was a sudden shortage of cash and m-wallets rushed to fill the vacuum. This was also helped by the sudden push in smartphone adoption, data rates plummeting through the introduction of 4G networks and digital India initiatives by the ruling government. The Early Majority demographic is a combination of the rural young and the urban old — who are relatively slower at adopting newer technology due to being too used to existing alternatives. To penetrate this segment, the m-wallets used a strategy of aggressive marketing and doled out discounts and cashbacks.

Late Majority: The late majority is the set of people that are either first time smartphone users, or do not have access to smartphone and/or the internet. This also includes people who are bound by the inertia of using cash payments, and do not understand digital wallets and their business. This segment doesn’t currently use mobile wallets, probably doesn’t equate m-wallet money with “real” money and is unaware of the possibility of the 2-way transfer that exists from these wallets to bank accounts. These people are perhaps also unaware about the concept of payment banks and the possibility of money stored in these accounts drawing an interest. The typical user in this category is older and/or a resident of a tier 3 city or rural India.

Laggards: The laggards are people who are typically very late to new technology adoption, and prefer the tried and tested methods of day-to-day operations. This includes people who consider technology such as internet and smartphones a luxury, use a feature phone and get talk time top-ups done at their neighbourhood stores. Members of this group resist taking up any new technology unless they “have to”. Most members of this group are from rural areas and older.

Mobile Wallet Transactions and Growth

The number of mobile wallet transactions got a massive fillip with demonetization. However, the value and volume of transactions in m-wallets still dwarfs in comparison to the total digital payment transactions.

While mobile wallets account for a significant 10% of the overall transaction volume, in terms of transaction value m-wallets form less than 1%. This can be due to a number of reasons, including the Rs20000 spend limit imposed by the RBI on non-KYC accounts, and the security concerns that people have with respect to transacting large sums through m-wallets.

Factors and Challenges affecting Product Adoption

Factors to growth

Demonetisation and the Digital India Movement

With the surprise announcement of demonetization on Nov 8 2016, the ATMs in the country were left dry unable to cope up with the demand for cash. In such a situation, the mobile wallets rushed in to fill the vacuum, by providing for a means to carry out transactions. Merchants ranging from shopkeepers, vegetable sellers, fuel pumps to even roadside chai shops started accepting mobile wallet payments. PayTM’s traffic increased by 435%, app downloads grew 200% and the overall transactions and transaction value saw a 250% increase[1]. Other wallets such as Mobikwik and FreeCharge saw similar increases in usage.

Another factor greatly helping the adoption of m-wallets is the Digital India initiative by the ruling government, which saw steps such as no service charges on online train ticket booking, BHIM digital payment app and NITI Aayog Lucky Grahak Lottery etc spread awareness and helped with greater adoption of online payment solutions, which also had a spillover effect on mobile wallet adoption.

Integration with mobile-first services

Already mentioned above, m-wallets such as PayTM were integrated from the very early days of the presence of services such as Uber and FreshMenu, at around the same time as these services were getting popular. The m-wallets thus also benefitted from the marketing spend and greater adoption of these services, and ensured repeat purchase through offers and discounts.

Smartphone and mobile internet revolution

M-wallets benefitted also from the launch of 4G services and the rapid drop in cost of internet access as well as the increased adoption of smartphones, both of which are essential to using m-wallets.

Convenience

This has been one of the most important growth factors for the adoption of mobile wallets, since transactions take shorter, do not require specialized equipment(other than a smartphone), and aren’t restricted through regulations such as 2 Factor Authentication.

Challenges

Lack of Interoperability

One of the biggest drawbacks to mobile wallets is their semi closed nature, where money in an m-wallet can be used with only specific merchants, and shopkeepers they have signed up with, and money cannot be transferred within wallets. While wallets do allow for money to be transferred back to their bank accounts and hence convert to “real” money, the charges involved are non-trivial. All of these factors contribute to limiting the usefulness of money stored in a mobile wallet.

Lack of Access to people without internet and/or credit cards and netbanking

The adoption of mobile wallets is severely held back due to the low internet and credit card/netbanking penetration in India. Both of these are necessary in order to use mobile wallets — the former for using mobile wallets and the latter for loading money into the mobile wallets. While attempts have been made to offer alternate methods to add cash to mobile wallets, they have been met with limited success owing mostly to the logistical costs involved in doing so.

Security Vulnerabilities:

Digital wallets expose users to risks such as phishing and social hacking. There have been a number of cases of data thefts as well as cases where individuals have lost money due to such attacks. This dents the credibility of m-wallets thus hindering its larger adoption. Various studies have suggested that security remains the biggest concern that made users hesitant to use mobile payment services.[2]

Growth Hacks Used

Starting with mobile recharges: One of the earliest growth hacks used in this industry was to start with the ‘beachhead’ strategy of mobile phone recharges. This was an excellent vertical to begin with, since most mobile plans are periodic in nature, and gives a natural “repeat user” base. The users were then captured by giving discounts to offer benefits relative to other alternatives.

Increasing the number of merchant partnerships: M-wallets did well what any marketplace model needs to do — scaling the supply first. By tying up across many different verticals including transport(Uber), movie ticketing, electricity and water bill payments, food ordering apps, railway and airline reservations and even mutual funds, m-wallets have ensured that the users keep coming back and capture a share of the demand for these services.

Cashbacks and discounting: One of the most significant ways m-wallet companies drove product adoption in a price sensitive market such as India was through cashbacks and discounts. Cashbacks were(and are) used in a variety of ways by wallets to attract new customers, as well as build repeat purchase and stickiness in the existing user base. Cashbacks and various promotional discounts are also used regularly when introducing new categories on the apps, such as free petrol on Mobikwik or massive cashbacks on airline ticket bookings on PayTM.

App Localization and Personalization: To move beyond urban users, m-wallets such as PayTM offer local language support across a number of languages, and highlight localized services for the specific user. To build a repeat purchase habit, wallets also send periodic reminders where possible to ensure bill payments are made through the app itself. PayTM-BESCOM integration is one such example, where an email reminder is sent every time a new bill is generated by PayTM.

Comparison with Other Payment Methods

UPI and USSD

UPI(Unified Payments Interface) was launched in India in 2016 and ever since has been considered a disruptor for digital payments. Its adoption also got a fillip due to friendly regulatory policy and the endorsement of a UPI app(BHIM) by the Prime Minister. Some of the shortcomings of mobile wallets, namely interoperability and security are solved with UPI.

Through USSD(Unstructured Supplementary Service Data), customers without smartphones and internet will be able to perform mobile banking transactions. This holds great potential for adoption since a majority of users in rural India still only have basic phones or feature phones. However, one major drawback of this technology is the difficulty involved in training users about USSD codes at scale.

Banks, armed with UPI and USSD, have solved the four major payments problems encountered by people by offering ease of usage, security, interoperability (works across banks and platforms) and by making payments without a smartphone. Mobile wallets, Sharma continues, are not interoperable, can’t be used without internet, and the less said about their security the better. — Ritesh Pai, Country Head, Digital Banking at Yes Bank

While USSD has been slow to take off, UPI has seen tremendous growth since its inception. While the relative transaction value is still less compared to alternatives, integration with popular apps and services such as WhatsApp[5] and Uber[4] will serve to expand the reach of UPI based payments and their adoption is poised to shoot up further.

Source: NPCI Data

Source: NPCI Data

At the same time, USSD transactions recorded in the month of May, 2017 was a paltry Rs 0.32 billion from 0.19 million transactions.[3]

Plastic Money(Credit/Debit Cards)

Credit and debit cards have been around for a while, and constitute a major chunk of digital payments. However, they haven’t been able to penetrate the Indian markets in a meaningful way for a number of reasons, including the lack of PoS machines in a majority of Indian stores and the lack of local language support in the technology used for carrying out these transactions.

As with other digital payment methods, we see that card payments too have grown steadily over the past few years, and got a boost after demonetization was announced in November 2016.

Despite low penetration, the average transaction amount is higher with card payments. After demonetization, while wallets added more users, the growth in transaction value was higher for credit cards(Rs 100 crore, vs Rs 80 crore for m-wallets).

Source: NPCI Data

NEFT, RTGS, IMPS, Netbanking

Launched in the 2000–2010 period, payment methods such as NEFT, IMPS and RTGS still form a substantial chunk of digital electronic payments. While being accessible only to people with bank accounts and low awareness is a major drawback with these technologies, these methods are particularly favoured for high value transactions, primarily due to no restrictions around minimum and maximum amounts. However, with the increased adoption of UPI based payments and the associated convenience, the usage of these technologies is expected to come down in the future.

Source: NPCI Data

The Way Forward

Due to favourable technological, political and regulatory environment coupled with deep discounting and heavy marketing, mobile wallets have seen a tremendous increase in usage in the last 5 years. However, how long the party will sustain remains an open question. Given the relative advantages offered by alternatives such as UPI and the Aadhar payment app — such as interoperability and direct debit from bank accounts, and with UPI getting increasingly integrated with various merchants and services, it is expected that UPI will eat the mobile wallet lunch. I’ll conclude with this quote by Amrish Rau, CEO and co-founder of PayU India.

I believe wallets are not going to be needed in the future. The concept that money resides in individual banks and only gets debited at the time of transaction from the account is the way forward. If the RBI mandates second factor authentication and Uber allows storing of debit cards directly and that money gets debited from the cards, I think that will kill the wallet